Ditching Your Mortgage Insurance

Dollar HouseI have been interviewed recently by several reporters working on articles about mortgage insurance. Their questions made me realize that many consumers are still confused about this important financial tool.

I have written several articles about mortgage insurance myself, but it occurred to me that I should offer a concise explanation of what MI is, how it works and why you may be happy it exists.

Someone borrowing more than 80% of the value of a property presents a greater risk of default. The lender wants to be protected from the possibility of loss, so they will require that the borrower get a policy of mortgage insurance (MI). This limits the potential loss if the borrower defaults on the loan.

The cost of MI varies with the loan-to-value ratio (LTV) and your credit score. Insurance for a 90% loan will cost .44%, or $110/mo for a $300,000 loan if you have a FICO score of 740 or higher. A borrower with a 680 FICO will pay a higher rate: .62%, or $170/mo for the same loan.

The lender will let you drop the MI once the LTV reaches 80%. Different lenders have different procedures, but in most cases, you can order an exterior-only appraisal to confirm the present value (it will cost around $325). If you’ve made your payments on time for at least a year, the lender will agree to drop the MI if the LTV is 80% or lower.

The news is not quite as good for FHA loans. The Federal Housing Administration recently decided, in its infinite wisdom, that the MI (currently 1.35%) must remain on the loan over its entire life. If your property has appreciated to where your LTV is 80% or lower, you’ll have to refinance into a conventional loan to get rid of MI. Even though the rate may be higher than your present FHA loan, the overall cost may drop enough to justify making the change.

Even though mortgage insurance may seem to be an unwelcome cost that benefits only the lender, the fact is that it can help you save money. If your property appraised for a lower price than you had hoped for, paying MI for a year or two can help you take advantage of today’s lower rates. Just be aware of your property’s value as it appreciates—your Realtor® would be more than happy to keep you informed—and get it removed as soon as your LTV drops to 80%.

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Housing Market Continues Its Positive Trend

houses-with-graph

There is definitely some good news about the housing market. CoreLogic has just released its latest report: home prices nationwide are up 11% in December compared to the year before. Part of this is the market correcting itself (prices had gone lower than they should have), but part is the continuing high demand for housing.

There are still many stories in the media about the supposed impossibility of getting a mortgage. Banks aren’t lending, they say. Credit standards are too high, so nobody apart from Daddy Warbucks can qualify for a mortgage.

I call bullpuckey. The process of getting a mortgage is more rigorous than it has been in the past—borrowers have to *gasp* document their income and assets—but the standards are not impossible at all. Anyone with a reasonable credit history and a cash down payment as low as .5% can become a homeowner.

Here’s the bottom line: real estate is still a great investment, not only for the value of having a roof over your head, but also because you can expect it to increase in value over time. I talk about why NOW is a good time to buy in an earlier article, “I Think We Should Wait.”

You can read the whole CoreLogic report here.

 

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Posted in Credit, Down Payment Assistance, FHA mortgages, First Time Home Buyers, Inside mortgages, Investing, VA Loans | 1 Comment

Sometimes all it takes is a phone call

Credit report phone callMy new client sat in my office with his wife and two school-aged children. They had saved enough cash for a substantial down payment and wanted a mortgage pre-approval. They were applying for a jumbo loan to buy their first home. The criteria for these programs are often more strict than for Fannie Mae and FHA loans.

I filled out their loan application while they were in my office, then pulled a credit report. They had very low debt. The wife’s score was close to 800, but the husband’s was barely over 700—too low for the loan they wanted. The culprit was one recent 30-day late payment to a local department score. The more recent the derogatory entry, the greater its impact on the credit score. This one late payment—about $25.00 on a $200 account—was costing nearly 100 points, I estimated. This one late payment could prevent these hard working people from getting their new home.

I suggested that they call the credit office of the department store. They should point out that they are good, loyal customers and would very much appreciate having this one entry removed from their credit report. It was just an oversight on their part, and they have always kept their account current.

They were skeptical. “You have nothing to lose,” I assured them. “The worst that can happen is that the store refuses to change the entry, in which case you haven’t lost anything. It’s worth a phone call.” He agreed to try.

The next day, my client called me. “They’re going to send me a letter,” he said. “They’re going to change the credit report!” He was jubilant.

Three days later, he faxed me the letter from the department store. They had agreed to remove any late payments before the present time and to notify the credit bureaus. Oh, and P.S: Thank you for being such a loyal customer.

I sent the letter to the credit bureaus with instructions to update his file immediately (it actually takes around 72 hours) and to send a report with the updated credit scores. We will be able to issue the pre-approval for his new loan before this week is out.

The lesson here is obvious: one simple phone call to a sympathetic credit office can mean success.

Anyone whose credit score is presently too low to qualify for a mortgage should follow my client’s example. There are myriad ways to raise a low credit score.

Sometimes it’s as easy as one short phone call.

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The Appraisal Dartboard

dartboardMy client was ecstatic. After making offers on five different properties, he had finally gotten an acceptance. He had prevailed over three competing offers because his offer was more than $20,000 above the asking price.

I ordered the appraisal as soon as I got the purchase contract from the buyer’s Realtor®. I received it six days later. The appraised value was $20,000 below the price buyer and seller had agreed on. At this point, the buyer could walk away without losing his deposit—or he could ask the seller to reduce his price. This is what he did.

At first, the seller refused. “How did he come up with THAT value?” he demanded. “Mine is the nicest house in the neighborhood!” I explained to him that an appraisal is not a “dartboard” number. It is driven by data.

The appraiser first describes the home (the “Subject”) in a standardized way: square footage, bedrooms and baths, amenities, condition, lot size, etc.). Then he lists other properties in the area that are similar to the Subject (“Comps”) that have sold within six months. He describes the Comps in the same standardized way. He adjusts the value of each one to be the equivalent of the Subject. If one of the comps is 400 square feet larger than the Subject, he will subtract from the selling price of the Comp, using a per-square-foot factor based on area standards. In Dublin, for example, the appraiser used $55 per foot, which reduced the Comp’s price by $22,000. He will make similar adjustments for room count, lot size, condition and other factors.

After adjusting each Comp, the appraiser will calculate a weighted average of the adjusted selling prices to arrive at his “opinion of value.” This is the number the lender will go by. A property two doors down with a high listing price will not affect the appraised value, because sellers can ask whatever they want for their properties.

The seller realized that if he put the property back on the market, he’d be faced with the same problem with a new buyer and new appraisal. He lowered his price and the buyers closed escrow shortly afterwards.

Afterwards, to celebrate, we went to my favorite brewpub for a nice game of darts.

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Posted in Appraisal, First Time Home Buyers, Investing, Negotiating, Refinance | Tagged , , , , , | 1 Comment

Missed Anniversary

calvin-hobbes-dancingToday, I discovered that an important milestone had gone by unnoticed. Two years and five days ago, my life abruptly changed. A small blood clot made its way through miles of veins and capillaries and lodged somewhere deep in the left side of my brain, flicking switches that were better left un-flicked. I had a stroke—technically a Transient Ischemic Attack, or TIA. They refer to this as a “mini-stroke,” but there is nothing “mini” about something that interrupts the blood flow to part of your brain and starts shutting down parts of your body.

I wrote about this event two days after it happened. People asked me, “Weren’t you scared?” The truth is, I wasn’t; even though I could have been incapacitated for the rest of my life, I was more interested in the procedures going on around me than in what kind of dire outcome there might have been.

The cause of this medical adventure was simple—and very common. High blood pressure (around 190/105 for those of you who like specifics) and moderately high cholesterol. That is a bad combination. Fortunately, because I got medical attention early, there has been no long-term damage. Now I take four pills every day—two for blood pressure, one for cholesterol and an aspirin to prevent future clots.

The most positive aspect of all this has been that I take my health seriously these days. Apart from taking those four little pills, I created a habit of exercising every day: two days in the gym with a trainer, walking/running a couple of miles the other days. The results have been gratifying: I have lost about 25 pounds without starving myself, and my blood pressure is typically 124/65—pretty much the numbers for a much younger dude. The doctor has been tapering off many of the medications I have been taking.

Here’s my real message: aside from my joy at being alive and vertical, I now realize that high blood pressure is a serious disease. It has no symptoms, and for many people, the first indication is a stroke or heart attack. Get checked.

And for those who say, “One of these days I’ll start exercising,” make it today. Even a short walk.

I’ll go with you.

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Obama Taps Brown Alumna for Fed Chair

YellenI’ll admit it: I’m proud of my alma mater, Brown University. There. I’ve said it. Since its founding in 1764, Brown has produced a long list of achievers: political leaders, inventors, authors, artists, scientists and more. (I know…some of you are saying, “How could they have gone so wrong with Parsons?” But that’s a story for another time) One alumna in particular, Janet Yellen, is about to make history.

The present Chairman of the Fed, Ben Bernanke, will step down in January of next year. President Obama will appoint Bernanke’s replacement, subject to Senate confirmation. The short list of candidates for his replacement have included Larry Summers and present Vice Chair, Janet Yellen. Two months ago, I made a case in this blog for Yellen’s appointment. Shortly thereafter, Larry Summers, who had been seen as the shoe-in for the position, withdrew from consideration. Did my article have anything to do with it? My vanity says, “of COURSE it did!”

Today, the news broke that Janet Yellen will be named as the next Chairman of the nation’s central bank—and the first woman to hold that post. This is welcome news for several reasons, not the least of which is that Dr. Yellen has been a consistent voice of reason with respect to the Fed’s monetary policies. Additionally, Larry Summers famously stated in a 2005 speech that (and I paraphrase) women statistically have mathematical ability inferior to men’s. However one might parse or spin his statements in that speech, it was generally interpreted as being dismissive of women. There is a certain poetic justice to Janet Yellen’s appointment to the post.

As Chairman, Yellen is generally seen as a “dove.” This means that she will in all likelihood continue Ben Bernanke’s accommodative monetary policies. This is unquestionably good news for the mortgage markets, since it is the Federal Reserve’s monthly purchase of mortgage-backed securities that is holding rates at their present attractive levels. Yellen is well respected in the Senate, and should enjoy a relatively easy confirmation. I am very happy that President Obama took my advice and selected Janet Yellen for this important post.

And Mr. President? Please feel free to consult me on any other appointments you may be considering. I’ll always take your call.

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Ask Joe Money

question-mark-moneyWe get a lot of questions at The Mortgage Insider. It seemed to me that it would be a good idea to have my alter ego, Joe Money, handle some of them for me. Here’s what showed up in the ol’ mailbox this week:

Dear Joe Money:

I keep reading about how the banks are only lending money to people with perfect credit. My wife had a late payment on her Macy’s card this year, so our credit score is down to 695. Can we still get a loan?

Responsible Hubby

Dear Hubby:

Many people have minor dings on their credit. The fact is that lenders do NOT require “perfect” credit to approve a loan. For a conventional loan, you could have a credit score as low as 620 and still be approved. That loan will have a higher rate than for someone with a score of 740 or higher—about .75% higher—but you may also be able to improve your scores a lot by paying down some credit card balances and resolving collection accounts, if you have any. Good luck!

Joe Money

Dear Joe Money,

I have just discovered that I got a 30 day late payment on my Macy’s card earlier this year. My hubby promised to mail the payment, but stuck it in his briefcase for three weeks before mailing it, so they reported us as late for 30 days. Can I still get a mortgage?

Responsible Wife

Dear Wife:

I am totally sympathetic to your plight. First, you can still get a mortgage, although it may be a bit more expensive. If your payment on that account is normally on time, you may be able to sweet-talk the credit department into removing that one entry, since you’re such a good customer. As for your problem with your hubby, that is a common problem; you might want to think twice before you entrust a payment to him in the future.

Joe Money

Dear Joe Money,

My wife and I have been renting for ten years. Our landlord has just raised our rent by $200 a month, so we are thinking about moving. Can we buy a house now, or should we wait until the prices and rates come back down?

Want a House

Dear Want,

Interest rates are still lower than they have been for years, and prices are reasonable. Both rates and prices are on the rise, though, so you may consider that your landlord is doing you a favor by causing you to think about owning a home. As a first-time buyer, you may be eligible for down payment assistance programs. There’s a program in California, for example, that will get you into a home for a down payment of ½%! If you are planning to stay put for a few years, owning your home could cost you quite a lot less than renting. You should talk to a lender to get pre-approved and start the process without delay.

Joe Money

Dear Joe Money,

I just bought a house with my girlfriend. I went away for a weekend, but when I came home, she had changed the locks. What should I do now?

Caught in Calabasas

Dear Caught,

Dude, I think you have mistaken me for Dear Abby. Write back when you have an actual mortgage question. Good luck!

Joe Money

If you have a question about mortgages, real estate or the meaning of life for Joe Money, just fill out the form below.

Until next time!

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Janet Yellen for Fed Chair

Janet Yellen

Ben Bernanke, who has been serving as Chairman of the Federal Reserve since 2006, will leave his post in January of next year. Mr. Bernanke has served his two terms under two very different presidents in historically difficult times.

President Obama will soon appoint a new Chairman to replace Mr. Bernanke. The two likely choices are former Secretary of the Treasury Larry Summers and current Vice Chair of the Federal Reserve Janet Yellen. I am writing this article in support of Ms. Yellen’s nomination to the post.

Full disclosure: Janet Yellen and I were classmates at Brown University, although we weren’t really in the same circles. It is possible that we took Econ 101 together, and if so, I’m sure she found it far more interesting than 19-year-old Joe Parsons did.

Mr. Summers has an enviable pedigree: BS in Economics from MIT, PhD from Harvard. He went on to become, at age 28, the youngest tenured professor at Harvard. He left Harvard in 1991 and served two years as Chief Economist of the World Bank. He joined the Clinton administration as Undersecretary for International Affairs in 1993. He was appointed Deputy Secretary of the Treasury in 1995, then Secretary of the Treasury in 1999, a post he held for 18 months. He left that position in 2001 with the inauguration of George W. Bush and served as President of Harvard until June, 2006.

Janet Yellen has an equally distinguished CV: She graduated Summa Cum Laude from Brown University in 1967. She received her PhD in Economics from Yale in 1971. She joined the faculty of Harvard as an Assistant Professor of Economics in 1971 and held that post until 1976, when she joined the Federal Reserve Board of Governors to serve as an economist for two years. She has taught at U.C. Berkeley’s Haas School of Business and received awards for excellence from that institution.

She served on President Clinton’s Council of Economic Advisers for two years. From 2004 until 2010, she was the President and Chief Executive Officer of the Federal Reserve Bank of San Francisco. She was made a voting member of the influential Federal Open Market Committee in 2009. In October, 2010, she was sworn in as Vice-Chair for the Federal Reserve System.

Ms. Yellen is generally regarded as a “dove,” meaning that she is in favor of continuing the Fed’s accommodative monetary policy (the “hawks” believe such a policy leads to unacceptable inflation).

Unlike Ms. Yellen, Larry Summers’ career has been marked by a certain amount of controversy. Although public life carries a certain risk of this, I believe some of these controversies make him a far less desirable candidate for this influential post than Ms. Yellen. In 2000, He teamed up with Alan Greenspan, then Fed Chair, and Ken Lay, then CEO of Enron, to pressure California Governor Gray Davis to relax California’s environmental standards. He explained that government regulation was the cause of the energy crisis.

Mr. Summers spearheaded the passage of Gramm-Leach-Bliley, the 1999 statute that repealed key provisions of 1933’s Glass-Steagal. Many believe that this deregulation contributed significantly to the financial crisis of 2008. He continued his campaign for financial deregulation with his support for the Commodity Futures Modernization Act of 2000, a law that deregulated certain financial derivatives—along with energy futures. The deregulation of Mortgage Backed Securities, Credit Default Swaps and Collateralized Debt Obligations were essential components of the mortgage crisis that led to the Great Recession.

During his presidency at Harvard, the university entered into a series of investments in financial derivatives totaling over $3.5 billion. These questionable investments ultimately lost $1 billion in value, forcing the University to borrow significant sums to meet margin calls. The decision to enter into these investments has been attributed to Summers and has been called “a massive interest-rate gamble.” He resigned in February, 2006.

There is a stark contrast between these two candidates for this powerful position. Where Larry Summers has continually advocated for ongoing deregulation and has personally profited millions of dollars in various fees from hedge funds and other companies, Janet Yellen’s career has been marked by a thoughtful approach to economic and monetary policy. In her years as an economist and as a public servant, she has consistently demonstrated a rational, studied approach to monetary policy.

For whatever it might be worth, I am pleased to offer my wholehearted support of her appointment to Chair of the Federal Reserve.

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New mortgage program to help first responders in SF

sfpd and sffd logosThis, I like. It’s no secret that San Francisco has some of the priciest real estate on the planet—the median price is a cool million. Because of this nosebleed-inducing pricing, more than 60% of San Francisco first responders—police, firefighters and EMTs—live outside the city.

Sure, they make a nice income, but still: getting together the down payment for a million dollar “starter” home is no small task. So having some assistance in the form of a no-payment loan of up to $100,000 can make all the difference.

The program was first proposed by Supervisor Mark Farrell and approved by the voters last year under Proposition C. The Mayor’s Office has promised to release all the details on Thursday. Those particulars will be available at www.sf-moh.org.

So far, the program sets aside $1 million each year for the first five years. According to the San Francisco Chronicle, 45 people have expressed interest.

If you know any police or fire people who work for San Francisco, you should tell them about this.

I think it’s a good start—and an excellent way to express gratitude to these people who regularly put their lives on the line for their community.

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Secrets of a Loan Officer … My Secrets, Actually

PFS Joe Parsons mugYou know you’ve made it in your industry when a publication like Forbes picks your brain.

Self-congratulations aside, I was actually pretty humbled when Linda Fiorella of LearnVest, a contributor to Forbes, picked my brain for an article, Secrets of a Loan Officer.

As much as I’ve blogged about the topics Ms. Fiorella asked me in the article, they’re things that every homebuyer applying for a mortgage and every homeowner looking to refinance should be aware of, such as …

What does a mortgage loan officer do?

So what happens if you don’t use a loan officer?

Why are mortgage rates constantly changing?

What top factors determine if someone gets a loan?

Is there anything that you can do to improve your chances of getting approved for a loan?

What are the most common reasons why people get turned down for loans?

If you’ve been denied a loan, what can you do to increase your chances with another lender?

How can I tell if it’s really worth it to refinance?

Any tips for finding the right mortgage lender?

If you or your client have any questions that weren’t answered in the article, subscribe to my blog or check the PFS Funding in the News page. You can also give me a call at 925-560-7644 or send me an email at joep@fpfmail.com.

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